The Flaws of Bitcoin Copycats

By Juan M. Villaverde on
April 23, 2018

Bitcoin is as brilliant as it is flawed.

Bitcoin’s brilliance was the genesis of a revolution called Distributed Ledger Technology (DLT).

It’s a technology that Andreas Antonopoulos calls “the internet of money” … that can ultimately lead to an entirely new financial system … that cannot be manipulated by any central authority … that can even form the basis of a new kind of legal system.

Bitcoin’s flaws stem from its first-mover disadvantage. As is often the case with the first iteration of any new technology, it is slow, expensive and has fatal design problems that are not easily overcome:

• There is no easy way to upgrade Bitcoin’s protocol (software code). Typically, the only solution is to create clones of Bitcoin, then upgrade a tad and start a brand-new network — Bitcoin copycats.

• Transactions take up to an hour to confirm. Worse, the network gets easily congested during times of high usage, making the transactions even more expensive and slow.

• Another major design flaw is lack of “settlement finality,” meaning that a transaction is never truly closed in an accounting sense. This may not be an issue for current uses, but it will be a major obstacle when blockchain is used for securities transactions, where settlement and ordering of transactions are key.

• Bitcoin has a limited supply. So, it’s a deflationary currency. The source of this design flaw is probably an overreaction to the 2008 financial crisis, which served as an inspiration for its launch. Remember, that’s when central banks started their decade-long experiment of perpetually inflating the money supply to prop up their fledgling economies. Bitcoin’s design is flawed in the opposite direction. It can never be increased even when it should be. And nothing can be done to reverse it.

• Consequently, Bitcoin cannot be used as a real currency. A store of value? Perhaps. But even that remains to be seen.

• Bitcoin mining (based on Proof-of-Work) is very centralized, with just a handful of miners controlling the majority of the hash power.

• Bitcoin mining requires the consumption of ever-increasing amounts of electricity. This is ultimately an uneconomical and inefficient way of securing a decentralized network. It works — no question about that. But engineers and scientists can and will find better alternatives in the future. No question about that either.

Here’s Bitcoin’s strength, its first-mover advantage: Despite all its deficiencies, Bitcoin can boast one thing that no other cryptocurrency in the world has: global brand recognition. Most people around the world have heard of Bitcoin; they know what it is.

Enter the Copycats

In an attempt to cash in on Bitcoin’s popularity and correct some of its obvious deficiencies, 2017 was also the heyday of the Bitcoin copycats: Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, Bitcoin God. The list goes on.

All of these were launched in an attempt to solve just one or two issues plaguing Bitcoin. So each Bitcoin copycat measures itself against the original — claiming to be superior, and hoping to enjoy Bitcoin’s popularity plus a bit more.

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And that’s the root of their own deficiencies: By trying to improve on a fundamentally flawed design, the copycats still inherit most of Bitcoin’s weaknesses — slow speed, poor scalability, high costs, energy inefficiency, lack of privacy and more.

Sure, Bitcoin Cash is eight times faster than the original Bitcoin. And yes, Bitcoin Gold has more decentralized mining than the original Bitcoin. But addressing just one or two of Bitcoin’s myriad issues is hardly enough. Specifically …

• The Bitcoin copycats still use deflationary models.

• They still rely on unsustainable electricity consumption for securing their networks.

• They still rely on a fee structure that gives too much power to the miners, often creating conflicts of interest between them and the end-users.

• They’re still plagued by the difficulty of upgrading the protocol.

And in addition to all these legacy issues retained from the original Bitcoin, there’s also one key element that makes the copycats decisively inferior to Bitcoin.

Not a single one enjoys Bitcoin’s usage and popularity.

That’s important. In fact, Bitcoin’s popularity is probably the only significant factor that’s currently sustaining its price. Virtually nothing about Bitcoin’s technology stands out compared to competing altcoins with superior technological features.

Ford Model T vs. Tesla Model S

Think of Bitcoin as Ford’s Model-T of cryptocurrencies and Bitcoin copycats as Ford’s Model A, its immediate successor with modest design improvements.

In contrast, altcoins are like the Tesla Model S. That comes with …

• Energy efficiency: No burning of finite resources to secure the network.

• Lightning-fast transactions that take seconds to confirm, compared to the still-slow 15 minutes for Bitcoin copycats.

• Scalability that allows tens of thousands of transactions in a second — instead of three of four by Bitcoin, or 10 to 12 by Bitcoin copycats.

I repeat: Bitcoin copycats are stuck in the 7-year-old fallacy that Bitcoin is the be-all-end-all of cryptocurrencies, so they shouldn’t try to change its design more than marginally.

The true disruptors in the space are developing radically new designs that are certain to make them the new leaders of the cryptocurrency revolution.

But not the copycats! They have been too shy to reinvent themselves, even to come up with original names. Unlike Bitcoin, their most likely destiny is to fall by the wayside.

What to Do

Investment gurus who want their subscribers to get exposure to the cryptocurrency markets often recommend exclusively Bitcoin.

The main reason: Many don’t understand, or are not comfortable with, the alternatives.

That’s kind of strange, especially after what happened in 2017.

It was an explosive year for the cryptocurrency space, kicking off a new phase in mainstream recognition of this technology. But it was also the year when Bitcoin’s flaws were most clearly exposed for all the world to witness.

I agree that Bitcoin can be part of a cryptocurrency portfolio, but not the dominant allocation.

Plus, when it comes to transactions, I stopped using Bitcoin in 2017 and never looked back.

Many others did the same or will likely follow in the near future. It’s about time the so-called investment “experts” also recognize this landmark shift away from Bitcoin.

No, Bitcoin will not die. It will always have been the first to market, the original design. And for the foreseeable future, it will continue to be the one most people know and many people love.

But invest most of your money in coins that have the best combination of BOTH adoption AND technology. These are the coins that get our higher grades. These are the ones where we see the best opportunities.

Scrap the rest, including Bitcoin copycats.

Best,

Juan

P.S. Bitcoin gets a C+ (“Fair”) grade from us this week. But it could easily tick back up to its recent B- rating again, and soon. Be among the first to know about these ratings changes, plus get notifications when we add cryptos to our coverage universe (like we did with RChain this week, and Siacoin last week). Just click here to see how.

Leave a comment

Comments 2

KeithApril 20, 2018

Thanks Juan,

I look forward to your commentary and ratings every week. Hodler for life.

Keith

SarmaApril 27, 2018

Hi Juan,
Could you please take another look at the chart @ following URL, that shows the % of Total Market Cap (Dominance)?https://coinmarketcap.com/charts/
We’re eager to hear your thoughts re: how this “bearish-looking” chart for Bitcoin is mildly/seriously conflicting (or, simply no correlation) with the various high-profile calls for BitCoin to go to $25,000 or even 10x that!
Thanks in advance!
P.S: FYI – I’m trying to figure out why EOS is going parabolic and (projecting from above URL) perhaps another crypto (unknown to me) may do the same.

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